At Winston & Strawn, the pricing strategy role is shared by the co-leaders of the firm’s AFA initiative: Kathrine Cain, the manager of business intelligence, and Keri Gavin, the controller. Cain reports to the firm’s director of business development, and Gavin reports to the firm’s CFO, but they work closely together to analyze the information that the firm needs for competitive pricing.

“The partners are encouraged to reach out to us for assistance with requests for alternative fee arrangements and budgets,” Cain says. “Some partners were already very good at defining budgets and pricing strategies, while some were new to the concepts. We coach them through the process of defining a budget and identifying pricing options that align with their client’s needs and expectations. In the two years since starting the formal initiative, we have made significant strides in providing the tools and techniques to support our lawyers and clients.”

Cain says she and Gavin always consider a wide range of options for AFA proposals, based on the client’s expectations and goals as well as the projected internal rate of return, the anticipated level of staffing for the matter, benchmarks based on previous matters, the firm’s history with that particular client, and other factors.

Glitzenstein says that since his firm specializes in intellectual property law, many of his firm’s cases fall into just a few categories, such as patent litigation, Fish & Richardson is able to ask the same questions in nearly every case and obtain useful answers that will help in its pricing.“We prefer to price on an AFA basis,” he says. “To do that, my staff goes through a case and interviews the lead attorney about the details. Is it a judge whom we know well? How many patents are under litigation? What is the technology? How complex is it? As a result of inquiries like this, we can put together a litigation budget and use it as a guide for pricing. By asking the right questions, we can predict which cases will be more challenging to handle.”

“We think that the fixed-fee arrangements that Fish & Richardson often proposes improve aspects of the lawyer-client relationship,” Glitzenstein says. “Fixed fees allow lawyers and clients to focus on the merits of the case so that they can reach the best result, without the same level of concern as in a traditional hourly fee arrangement that changes to the case strategy, or unexpected developments, will significantly increase the cost to the client.”

Of course, in every firm, ultimately the success or failure of this new pricing movement will depend on buy in from the partners.

Mayer Brown’sByrd says that although it is not required that partners consult him when they need to respond to an RFP or develop an AFA proposal, it is highly recommended, and that his plate has been full.

Matt Laws, head of the pricing program at Reed Smith, where just about 20 percent of the annual revenue comes from AFAs, says his role “has been very well received . . .. Partners do tend to call every time a potential engagement comes up,” Laws says.

Laws says Reed Smith does not have “any strict guidelines about what we can or cannot do to win a client’s business. Any proactive approach to meeting a client’s needs is likely to be approved.”

In fact, Laws says he sometimes finds himself and his team having direct contact with the clients’ financial officers during the bidding process―something that would have been unthinkable only a few years ago. “In the old relationship, partners would work with corporate general counsel. Now, we see finance people and CFOs from the client companies. The process of online bidding, which has become more and more common, reduces the importance of the historical relationship between the firm and the client.”

Another interesting trend in this area is a growing emphasis on project management. According to Baker & McKenzie’sDodds: “Over the last 18 months, the biggest change in the legal pricing field is a greater emphasis on project management and how we deliver services. Law firm clients are now looking for demonstrable value and efficiency, and we should not shy away from this challenge” This should not be surprising, given that once a firm is committed to a fixed price or an hourly fee cap, the most important determinant of profitability is being able to meet the client’s needs within a predetermined budget.

That’s why efficiency is on everyone’s minds these days. In the Altman Weil survey quoted at the beginning of this article, managing partners reviewed 15 current trends, and gave their opinions about which were temporary and which were permanent. Price competition was number two on the list, with 90 percent saying it was permanent. The only trend rated higher was the related idea of improving practice efficiency. 94 percent saw that as a permanent change.

The trend of appointing specialized pricing officials and devoting more effort to analyzing pricing is expected to increase. The International Legal Technology Association (ILTA) recently formed a Financial Management Peer Group to support this movement.

“Pricing is both an art and a science,” says Vinson & Elkins’Brown. “We need to focus on both if we are going to grow our business. There are a host of pricing strategies out there, and lawyers are now just touching the surface. This is a dynamic world and my job is changing on almost a daily basis. The heat is getting turned up on law firms, and the pace of change is accelerating.”

March 21, 2012

A few weeks ago, Bloomberg Law Reports published an article I wrote with Jonathan Groner entitled “The Rise of the Pricing Director.” Part 1 of this article is reproduced below. To download a pdf of the complete article, click here.

The economic balance of power has shifted to clients. Just a few short years ago large law firms reigned supreme. Now it seems that almost all large corporations and their in-house counsel are asking for some sort of price break from their lawyers―even from firms they have used for decades. Many General Counsel are seeing their legal budgets reduced, and they are passing the pressure along to their outside law firms.

As a result, large firms see pricing analysis and policy as more important than ever, and some are creating new pricing director positions to help them succeed in an ever more challenging environment.

Stuart Dodds became Baker & McKenzie’s first Director of Global Pricing last July, after serving for three years as Global Head of Pricing at Linklaters. His job includes four main components: “We help set the price in a proposal, help get the price, help our fee earners manage the price through project management, and then review how effective the pricing approach taken has been on a long-term basis for both our client and our firm. We are building a whole infrastructure within the firm with pricing do’s and don’ts.” Much of Dodds’ time is focused initially on the firm’s larger clients, and one key goal is to help assure pricing consistency and rationality for a firm with 70 offices around the world and over 3,750 lawyers.

The same month that Dodds began at Baker & McKenzie, Toby Brown was hired by Vinson & Elkins to serve as its first Pricing Director. The firm’s leaders have put out the word that whenever pricing is an issue with an important client, Toby should be consulted early and often. One of the most important aspects of his job is to “create a culture of having conversations about value. Lawyers are really good at talking to clients about legal issues,” says Brown. “Now, however, they need to add another dimension to the conversation to include value, pricing and efficiency. . . . Sometimes I think my job is almost 100 percent business development.”

Others with related titles also emphasize how pricing is tied to client satisfaction and new business. Matt Laws, alternative fee arrangement senior manager and head of the pricing group at Reed Smith, says “I see myself as working for the firm and for the client at the same time. I try to find that middle ground, a mutually beneficial arrangement.”

Similarly, Vinson & Elkins’ Brown says “I like to walk the client through a whole list of questions. Sometimes, they won’t immediately understand what their own price sensitivity is. My job is to get them thinking about what matters most to them. I can be seen as an internal consultant to the lawyers in the firm, and also to the clients.”

Although at this time only a small number of firms have a separate pricing director or department, many see it as the wave of the future. “I find it hard to see how major firms could not organize themselves this way,” says Michael Byrd, Assistant Director of Pricing Strategy and Analysis at Mayer Brown. “What we do fits somewhere in between finance and business development. It’s at the same time both numbers-driven and creative.”

Mayer Brown’s Byrd sees the main benefit of a proactive pricing strategy as “increased competitiveness to keep us in the forefront of the market.” Both Byrd, and the partners he works with, believe that in his 18 months at the firm, the new emphasis on pricing has helped increase responsiveness to client needs, increase client satisfaction, and add value.

One key factor that is driving the pricing movement is the new emphasis on alternative fee arrangements (AFAs), including fixed and contingent fees. According to Altman Weil’s 2011 Chief Legal Officer survey, AFAs now account for about 14 percent of all legal fee revenue. This figure is still small compared to the 86 percent that is hourly, but it is measured in the billions and all of the forces of change are headed toward more AFAs. As Joe Morford, managing partner of Tucker Ellis & West put it, “Once we started working for a client with AFAs, not a single one has ever wanted to go back to hourly.”

In the good old days of hourly arrangements with rates that went up every year, it did not require sophisticated financial analysis to send a bill that multiplied each lawyer’s hourly rate by the number of hours spent. But to make AFAs profitable, law firms now need to spend more time thinking about pricing.

Next week’s post will include more examples from these firms and also from Fish & Richardson, Winston & Strawn, and Reed Smith.

March 20, 2012

On Thursday April 19 at 1 PM Eastern, Jim Hassett will be offering a free webinar on “How to Develop New Business in an Uncertain Economy” with Ian Nelson, VP of Business Development and Marketing at the Practical Law Company. For details and a sign-up form, click here.

The first four sections of that book review a great deal of interesting theory and a number of arguments against hourly billing. If you want to focus on the “how to,” you can jump directly to Part V, which describes Baker’s “Eight steps to implementing value pricing”:

1) Conversation. Talk to the client to determine her wants and needs. This requires genuine communication, so you must listen actively and comprehend what is on the client’s mind.

2) Pricing the customer:Questions for the value council. Pricing is of such importance that Baker says each firm should have a value council which studies the results of the value conversation, and considers the best strategy for pricing each matter.

3) Developing and pricing options. The analysis in steps 1 and 2 can lead to an internal discussion of several different options to offer a client, at different price levels. According to Baker, this can help the client to think about what is really of value for him and help the firm close a deal.

4) Presenting options to the customer. Thenit is time to effectively present the options to the client, and address any objections.

5) Customer selection codified into the fixed price agreement. Baker assumes this conversation will lead to a fixed price agreement, which must be written carefully to “memorialize the meeting of the minds between the firm and the customer.” (p. 289) Chapter 32 includes a sample fixed price agreement.

7) Scope creep and change orders. In today’s dynamic business environment, changes in requirements are almost inevitable. The firm and the client must have plans in place to decide when changes in scope lead to a change in price, and to resolve any problems or disagreements.

8) Pricing after action reviews. The US Army has a policy of after action reviews to evaluate missions after the fact and learn from what happened. This same type of retrospective review is helpful for setting future prices.

Each of these eight steps is described in depth in its own chapter. For example, in the chapter on Step 1’s conversation, Baker talks about:

Twenty-seven questions you could ask the client (page 241).

How to start the conversation and effectively point it in the right direction.

How to listen carefully and hear what the client wants without dominating the conversation.

How the firm should deal with clients who try to conceal information about how much your services are valued or what other firms may charge.

How should you discuss risk with the clients?

Whether you agree with Baker’s rejection of hourly billing or not, the information in this chapter can be very useful in finding the best price. Similarly, Chapter 29 goes over the key elements of Step 2 –what to do when you get back to the office and work on your pricing strategy based on that conversation. Again there are long lists of useful tips:

What constitutes a good price? On page 245 there is a list of sixteen items to consider –including “Not allowing your dumbest competitors to set your price” which is related to the issue of avoiding price wars, as discussed in Part 3 of this series.

What questions should you ask yourself before setting the price? There is a list of thirty-five questions on page 247.

Four types of buyers – price buyers, value buyers, convenience buyers and relationship buyers – and how to deal with each.

What are the psychological factors that affect the price sensitivity of the client?

Every lawyer can find valuable ideas and tools in this book, whether you agree with Baker’s rejection of hourly billing or not. However, you may question his optimism about what the market will bear for value pricing. On p. 275 in the section on “Dipping your toe into the water” for fixed pricing, Baker suggests calculating your initial fixed price estimate with a budget based on what you think your normal billable hours would be and then adding a premium of 50% to 90%. That would be great way for law firms to do it, if they could find clients who were willing to pay 50% to 90% premiums in the current marketplace. A few firms may. But from what we’ve seen, most clients are looking to cut costs, and the firms that win fixed price deals these days often get no premium at all.

While we are not aware of any AmLaw 100 firms that have gone so far as to appoint the Value Council mentioned in Step 2, we did write an article for Bloomberg Law Reports recently entitled “The Rise of the Pricing Director,” including interviews with senior lawyers and staff at Baker & McKenzie, Fish & Richardson, Mayer Brown, Vinson & Elkins, Reed Smith and Winston & Strawn which described what law firms are doing to address a number of the issues described in Baker’s book. Our next two posts will reproduce that article, and then a few weeks later we will return to this series and a description of other approaches firms are taking to pricing.

March 07, 2012

When lawyers think about selling, many immediately start planning how to find new clients. But selling begins at home, and you will have much greater success if you focus first on the clients you already have. Even if you already handle 100% of their legal business, these days you must work hard on defensive marketing to ensure that they are raving fans, and will not be tempted when competitors make special offers. For checklists of the most effective ways to increase client satisfaction, see my new book the Legal Business Development Quick Reference Guide.

The first Wednesday of every month is devoted to a very short and simple tip like this to help lawyers increase efficiency, provide greater value to their clients and/or develop new business.